1. .
Devaluation can be used to treat the balance of payments only
if the supply and demand of the factors of production are elastic. In most
underdeveloped countries, since the import and export amounts are
predetermined by some external factors, the devaluation cannot provide its function,
instead, it results in price increases. One of the important effects of devaluation
is that increases in foreign currency debts in terms of domestic currency amount.
Even if the domestic market producers, who are indebted to foreign
exchange, are driven into bankruptcy due to their large payments arising
from this exchange rate differences, market prices close this gap in a long
term. So, this is in fact nothing more than a liquidity crunch over time. On the
other hand, the IMF says that 'the appropriate exchange rate is the
rate that will provide long-term net capital inflow'. The aim here is to reach
sustainable capital movements in the long run. The extent to which the IMF
will implement this view will only be seen as capital and credit flows
from international money markets to countries in need will be limited and then current
account balances deteriorated.
GLOBAL PEACE, DEVALUATION AND IMF
Dr Haluk Ferden GÜRSEL*
The picture, which is observed gradually as we leave years behind, is again a picture
of many depreciations of the currencies of the underdeveloped countries. Turkey did not stay
out of these, and as a result of the economic depression going on, the
depreciation of its currency continued in recent years.
The persistence of the inflation rate, albeit at a decreasing rate, indicates
that the depreciation of the currency will continue in the near future.
However, the 80’s were not a decrease in value for the currencies of all less developed
countries. A few countries’ currencies managed to increase the real values. The real value
increase, as used here, refers to the increase in the current exchange rate adjusted for the
difference in inflation rates. Despite this improvement, the underdeveloped countries
naturally continued to borrow and for example in 1979 a gross fund flow of 43 billion US
dollars occurred to these countries. The current account deficits of non-oil-producing
underdeveloped countries in 1979 reached a record level of 45 billion dollars. While the
words 'go to the IMF' are echoing in the ears of underdeveloped country administrators
-especially those who have deficits- increasingly, it is understood that this institution has
written the unchangeable recipe of 'devaluation' once again, almost every time. Until now, the
IMF presence continued to be similar.
WHY DEVALUATION?
According to the information that has now entered even undergraduate

2. economics textbooks, devaluation can be used to treat the balance of payments only if
the supply and demand of the production factors are elastic. The amounts of imports and
exports of most underdeveloped countries are predetermined by certain factors. International
prices are essential for most exports, and the least developed country alone cannot influence
these prices. In this case, it cannot gain more by lowering the prices. As for imports, since it
mainly consists of basic goods (oil, raw materials, foodstuffs, capital goods), the amount of
imports cannot be reduced even if their prices increase gradually. Under these circumstances,
the devaluation of the balance of payments is not being successful in closing the deficit, it
results in price increases instead of deflation.
Based on this idea, less developed countries oppose devaluation. Moreover, since all
of them have been trying to reduce their imports since the first 1973 oil crisis, the import
price elasticity of these countries is lower than they were five or six years ago. On the other
hand, while world trade is in recession, it may be unsuccessful to keep the export amount
constant, regardless of the price, and notable decreases can be observed from time to time.
If the inflation rate of the underdeveloped countries is higher than that of the country's
trade partners, keeping domestic expenditures constant can only be possible in two ways
without causing a deterioration in the foreign trade balance: The first is foreign trade
restrictions and the second is devaluation. Foreign trade restrictions aim not to affect the
national economy from price fluctuations in the outside world. However, as the inflation gap
between the country and its trading partners grows, or in other words, the country's
currency becomes 'overvalued', the pressure on these controls increases and the chances of
breaking the rules introduced to restrict trade increase. The result is that the underdeveloped
country, which persistently avoids devaluation, is dragged into a major economic crisis. This
time, again, a high rate of devaluation becomes the only medicine to cut the knot created by
these trade registrations. However, in this case, this high rate of devaluation cannot solve any
of the structural problems that the country initially cited as the reason for avoiding
devaluation.
It is clear that an underdeveloped country has prices that formed in a different order
from the price formation structure in international markets, in bottlenecks, constraints and
resource shortages. On the other hand, national development aspirations also explain the need
to shift both internal and external resources in certain ‘desired’ directions by the country
governments. It is not possible to achieve this resource shift with the price structures of
underdeveloped countries. It is also observed that it is very difficult to realize this shift with
comprehensive control or planning.
IT SHOULD BE 'PROGRESSIVE'
One of the important effects of the devaluation is to increase the amount of debt in
terms of the domestic currency. Underdeveloped country companies, which are foreign
currency debtors and produce for the domestic market, face the risk of bankruptcy due to the
exchange rate differences they have to pay after a large-scale devaluation. In the long run
though, market prices pay for the difference. So, this is really nothing more than
a liquidity crunch over time. For this reason, it may be suggested as a more desirable
policy to do it gradually, if devaluation is to be made, so as not to suddenly aggravate the
pressure on the domestic market.
According to the information available for example in 80’s, the currency

3. of seven of the eight underdeveloped countries in the sample, which borrowed heavily from
international money markets and went into devaluation for reasons parallel to
the views advocated by the IMF, increased in value this time.
For example, in Peru, which has devalued more than 67 percent
in total since mid-1977, the gap between the official and the parallel market
has almost closed. After the devaluation of 45 percent in Mexico in 1976, although
prices increased by more than 10 percent of the US inflation rate, this
development does not indicate an immediate devaluation requirement. After the 40 percent
devaluation in Indonesia in November 1978, the rate of upward price changes
increased, and everyone was questioning the ‘miracle’ of the devaluation.
The appreciation of the 'peso' in Argentina started after the government's
decision to open up the economy to international competition in the
medium term and to lift import walls and other forms of safeguards over time.
In Brazil, the 'monthly devaluation' rates have been increased as the inflation
rate has exceeded previous expectations. In 1979 this country the currency has lost real value.
With the implementation of the accelerated monthly devaluation rate, it is expected that total
rate of devaluations will be faster than the inflation rate starting from the end of 1980
and the depreciation of the currency will stop to a large extent. After the devaluations of
1974-1975, the currencies of Korea, Nationalist China and the Philippines increased in value
by up to 10 percent later.
IMF PRESCRIPTION
The fact that almost everyone now sees 'devaluation' as identical to the 'IMF' name
actually arises from going to the IMF in most cases when the proportional prices and external
balance can only be resolved with one large or series of small devaluations. The IMF takes
the decision to support the country's stabilization program at the moment when the economic
situation is at its most disproportionate, and it is in a position to write the known prescription.
The increasing reactions in recent years have been helpful in bringing the Fund to a certain
understanding of 'flexibility'. Bulent Ecevit's Government in Turkey was one of the countries
that contributed to the formation of this novel understanding in 1978 by trying to explain to
the IMF that it is difficult to reconcile the antipathic devaluation decision with the concepts
and values of democracy. As a result, the Fund's annual report included the following
sentences: 'The Fund … understands the frequent opposition of the relevant government
authorities to the exchange rate changes necessary to remedy the situation caused by the
persistent balance of payments deficit'. In the report, the Fund also notes that 'it is aware of
the short-term import and export price elasticities of the underdeveloped countries, pressures
on domestic prices, and the fact that a devaluation that is not supported by appropriate
policies will not yield any desired effects’.
Again, according to the same source, previous trials have shown that the long-term
negative effects of delaying the devaluation outweigh the benefit to be gained from this delay
in the short-term. Especially, this fact becomes even clearer in the case of an increase in
domestic prices without resulting of any exchange rate adjustment, in other words, in an
event of non-imported inflation that is independent of the outside world.
If the difference between the real rate and the official rate is not too great, it is
debatable whether the long-term benefits to be gained without delaying the devaluation will
outweigh. Perhaps the political benefit may be appropriate here in the economic sense as

4. well. Because devaluation can basically result in a start an upward price action. But, for
example, if there is an annual inflation rate exceeding 50 percent, it is inevitable to
re-determine the nominal exchange rate as soon as possible even in order to keep the real
exchange rates 'fixed'. In this case, it is aimed to maintain the competitive power of the
country in the foreign markets. Gaining new markets and competitiveness will only be
possible after the devaluation in line with this 50 percent price increase and in addition to this
devaluation rate.
For example, if domestic inflation is 20 percent, the country's major trade and if there
is a 5-10 percent inflation difference with the partner, is it worth playing the exchange rate?
The answer to this is negative. For example, Indonesia 1977-1978 period, it experienced an
inflation test of less than 10 percent on average, and reduced the exchange rate to 19 percent
below the 1975-1976 rate by a devaluation. However, since the 1978 devaluation, annual
domestic inflation has exceeded 25 percent. We wonder if the fact that the government
increased the exchange rate without any valid reason has no role in this?
Devaluation describes a cost increase due to the increase in imported input
costs for those who produce goods for the domestic market. The only
practically viable way to compensate for this cost increase is to increase the
internal price of the good produced.
Next year, judging by the developments in recent years, the ever-increasing number of
underdeveloped countries facing a large number of balance of payments deficits will knock
on the door of the IMF. Such countries will generally be among those that are too small to
affect world trade and international prices, whose export goods are limited, and whose
foreign trade segments (especially imports) are active. As in the past, the IMF would again be
writing prescriptions for exchange rate changes, it is clear that an increasing number of
underdeveloped countries will be faced with difficult economic decision options. The
possibility of such economic decisions to have political consequences also aggravate the
situation. However, while the IMF said that 'the appropriate exchange rate is the rate that the
one will provide a long-term net capital inflow in the amount that is expressed in the current
account net balance', it has also emphasized its view of acting more ‘flexible’ in this regard.
The aim is to reach sustainable capital movements in the long run. Resisting to adjust the
exchange rate in short periods in a way that might have political consequences and if there is
no absolute necessity as explained above, may do more harm than good to the economy. The
extent to which the IMF will implement this ‘soft’ view will only be seen as capital and credit
flows from international money markets to these countries are kept limited and current
account balances deteriorate more. It is clear that a more tolerant IMF, which will also help to
ensure confidence in market economies, will serve more to the world economy and global
peace.
*The data used is not current and based on a previous thesis, but we think that the conclusions are still actual and relevant.